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Hello, and welcome to the PowerPlay podcast, the podcast that talks tactics for renewable investments and assets. My name is Dan Cashmore, and I'm joined today by Matt Buckle. How are doing, Matt?
Speaker 2:Good. Thanks, Dan. Looking forward to chatting.
Speaker 1:So in this current series, we're going to be talking about the effective management of risks on assets throughout their life cycle. And and, really, we're concerned here with the physical aspects of the renewable asset, I. E, the kit itself. And in each episode, we're introducing an issue, and then we're gonna talk tactics on how to deal with that in order to basically maximize value or minimize the detriment to the asset or the portfolio. And excitingly, this is our first episode in the series, and we're gonna be talking about the issue of effective operation and maintenance.
Speaker 1:So, Matt, can I start us off by just asking you to explain why that is so important and from your perspective, what asset managers should be focusing on?
Speaker 2:Yeah. Thanks, Dan. So I think it's really important because even small reductions in production can have a large impact over the long run. So asset managers need to ensure that they're dealing quickly and effectively with any downtime or dips in performance and other reactive maintenance type issues. So I think that, you know, that can involve not only ensuring that they have effective and maintained remote monitoring systems and processes in place, but also acting on issues when they arise promptly and keeping an eye on threshold levels to manage when proactive steps are needed.
Speaker 2:You know, ultimately, it it's about ensuring that periods of peak generation are maximized.
Speaker 1:And so putting yourself in in the shoes of an asset manager, if you see performance on a of an asset is beginning to drop, what are the initial steps that you'd recommend taking?
Speaker 2:Yeah. I I think the starting point and, you know, apologies if this is stating the obvious. But the first step, I think, is to investigate causes and begin discussions around, you know, what is causing that drop off in performance. Is it a plant and machinery issue? Is it an operation and maintenance issue?
Speaker 2:And increasingly importantly, you know, is proper data around that being captured as potential future evidence. But initially, it's about ascertaining what the issue is rather than any kind of finger pointing or or anything like that. Then if it is an O and M issue, there are normally a number of non confrontational steps that can be taken. Sometimes those are prescribed under the contract. But even if they're not, the goal really is to trigger a sensible conversation about the issues on-site and to pursue a commercial dialogue that looks to improve performance.
Speaker 2:And and often, actually, informal communications that firmly but fairly remind the n o O and M contractor of its obligations can be effective. So highlighting, for example, any specific issues under the planned maintenance plan, especially if the contractor has perhaps been going off piece due to any resourcing constraints or if there are any methods of working that are contributing to reduce performance and that need to be addressed. And sometimes, frankly, there there is simply a lack of understanding on the part of the contractor as to their own obligations under the O and M contract. So, you know, really discussion and informal communication around that is a is a sensible place to start. And then, you you know, if that doesn't generate the desired traction and if things still aren't improving, then I think it's a case inevitably of escalating that communication to a more formal level and perhaps issuing notices of breach that formally remind the O and M contractor its obligations and really highlight those areas in which they are falling short.
Speaker 2:And, obviously, you know, the goal at that stage is the same. You're you're looking to get engagement on tackling issues and improving performance. But by recording that formally, you may first of all, you may succeed in getting their attention. But you also begin to create that paper trail around any nonperformance, which can be incredibly important if things continue to escalate.
Speaker 1:Yeah. Absolutely. That that that paper trail, that audit trail is is something which Us Us lawyers always always hark on about. Absolutely. So if you've had those initial communications, you know, the sort of nonformal communications and and perhaps you've even submitted notice of breach and things still aren't improving.
Speaker 1:What, from your perspective, do you think the likely options for an asset owner to consider next?
Speaker 2:Well yeah. So, generally, what we'd expect to see in in that context is a is a liquidated damages mechanism, making LDs available for any failings against availability or performance ratio guarantees. So a key next step really would be, you know, making sure that performance against any such guarantees is being monitored properly, data is gathered, and that any mechanism that's available is being implemented in the right way. And, you know, a number of issues can arise. So, for example, it it it usually takes a long time to to get hold of the data, and then it can take time to agree the calculation, particularly since there will often be, you know, debate or a bit of haggling over any excluded periods.
Speaker 2:Yep. Yep. So it's it's really about trying to find a way to make that mechanism work efficiently and and speed up the process of getting to a remedy. Then in the case of, you know, for example, wind assets in particular, you you generally have the slightly odd position that you're on the supplier's terms, which means there's typically a service fee to pay upfront. And so even though you may have a a valid LD claim for a much larger sum, you can be in a position of having to pay out upfront knowing that at some point, you'll claim back a sizable LD amount.
Speaker 2:And so you need to be thinking both legally, but, you know, also perhaps more practically about whether there's a sensible way of setting off and and ensuring you protect your position as as best you can. Key thing is always trying to ensure that there's a clear calculation of an entitlement that's as easy to understand as as possible. They can they can obviously get very complex, but trying to make sure that any formula is properly followed and recourse to any any mechanism is is properly notified is is is really key. Then if I think a bit, you know, outside of LDs, but beyond that, you know, it's also worth thinking about whether any step in rights might be available. This might arise in particular, for example, if the o and m contractor is failing to do reactive maintenance.
Speaker 2:So if issues are remaining unresolved for a long period of time, can you get another party to come in and fix them, solve the performance issues at the contractor's cost? I think the key thing there again is to ensure that any contractual process is being carefully and strictly followed.
Speaker 1:Mhmm.
Speaker 2:It's always important to make sure correct notices are being issued on a timely basis. You know, are you are you effectively triggering your rights under the contract? And then, you know, you need, of course, in that context, also be taking and keeping really good records of any works that are required and perhaps also, you know, inviting the O and M contractor themselves to take their own records of the scope and the cost of those works. I think that can,
Speaker 1:you know,
Speaker 2:to avoid debate on those further down the line. And then, of course, you know, with anytime you're looking to exercise step in rights, you also need to consider what impact that might have on any existing warranties over the kit. And then look. I mean, the the the final option in an o and m contract context is, you know, the nuclear option really is termination.
Speaker 1:And, you
Speaker 2:know, as we've discussed, poor performance needs to be effectively managed and dealt with under the contract. But realistically, there always has to come a point where if performance can't be recovered, then the client really has to consider whether it might be better off terminating that agreement altogether and going with a replacement contractor. You know, there will certainly be circumstances where that is more compelling, you know, particularly if there are health and safety issues that, you know, springs to mind Yeah. For example. But termination it on the flip side, termination is is clearly quite a drastic and draconian step, and it can be very difficult consequences for getting it wrong, including exposure to significant damages claims from the contractor.
Speaker 2:And and there are practical problems as well, you know, managing the transition to the new contractor, any handover requirements, and so on. So it it definitely needs to be managed properly and be carefully thought through. You know, we we definitely say always needs to be done with proper legal advice. But we certainly have experience of of of termination to remove an underperforming contractor going really well and and actually leading to a significant improvement in the performance of the assets.
Speaker 1:Thanks, Matt. That that's helpful. So LDs is one option. Step in rights is another option. And, potentially, as you say, the nuclear option, giving the pun, of of termination.
Speaker 1:We've talked quite a bit there about o and m issues. But I suppose, what what if the cause or causes of performance issues with the asset are are more fundamental issues with the plant and machinery itself? What's the approach there?
Speaker 2:In in broad terms, you know, I think I think the first thing actually is is still to ensure that the o and m contractor is properly identifying and managing any such issues, complying with their operational obligations, and doing doing their job and really working with you to take the position to the equipment manufacturer. So, you know, if there are problems with bits of kit, the obvious answer is to consider any warranty claims that you might have against manufacturers. You know, if you're doing that, you need to be making sure that you understand what the warranty covers, how to make claims under those, and and also, this is really important, when those warranties expire. I think there can be sometimes a temptation to want to fully investigate and present a a fully detailed substantiated claim, but very often, there can be time bar issues with those warranties that mean notices need to be issued to a manufacturer, perhaps without the the ideal level of detail. And and so that needs to be really carefully managed.
Speaker 2:Even then, it's it's normally key to show that equipment has been maintained in accordance with the manufacturer's recommendations, and that that can give rise to some tension in certain contracts where perhaps the equipment manufacturer is also the one doing the the o and m. And, you know, we talked a moment ago about step in rights. It it can potentially invalidate any available warranties if you've exercised step in rights and and had someone else maintain the equipment. So, again, this process needs to be carefully managed. You know?
Speaker 2:And then I think there are there may be other remedies and issues that need to be considered more broadly depending on on the context. For example, whether the performance issues are, you know, actually perhaps due to problems of defective design giving rise to potentially larger claims. And, you know, we certainly have experience in the team of kit that has been built and installed to spec, but the design concept has just proven not to work in practice, which can obviously give rise to big claims.
Speaker 1:Yeah. Thanks, Matt. I I might just build on one one of the points that you made around notification and a practical point, really, which is making sure that you get that notice right. A lot of equipment manufacturers have different way of submitting those claims that are perhaps different to what is stated in the warranty. So they'll have portals, for example, where you submit these claims, and you just need to be very conscious that, yes, you're doing that because practically that's how you further the warranty claim.
Speaker 1:But if your contractual warranty says you'll send a notice to this address, etcetera, on blue paper, then you obviously wanna be making sure that you're doing that as well to make sure that you've complied with the the contractual requirements.
Speaker 2:Yeah. I I think that's absolutely right. And, you know, there are also different approaches that different manufacturers might take to wanting to investigate the issues, whether they want to visit and investigate themselves or or happy to accept reports from TAs and and so on. So, yeah, absolutely. It needs to be carefully managed.
Speaker 1:Yeah. Sampling and and everything like that. So just want to look ahead a little into the future. As the renewables industry continues to grow and and mature, what do you see as the sorts of opportunities available to further reduce risks with assets?
Speaker 2:I think it's a really interesting question. I think the first thing that occurs to me, and I've mentioned it a couple of times, I think, is the importance of harnessing the power of data to get the most out of your assets. So we're seeing clients building digital twins, for example, which can lead to proactive management of issues and and the spotting of issues before they arise. You know, meaning amongst other things that you can be ahead of long lead times for for kit. You know, another thing we've seen amongst clients is a is an uptake in those clients with larger portfolios, certainly acquiring multiple sets of spare parts, which are then stored with the O and M contractor and so can be deployed far quicker to sites when they're needed.
Speaker 2:You know, again, that can need careful thought from a practical and compatibility perspective in in terms of the ability to chop in and change equipment, but also from an ownership perspective given the way that portfolios are structured and funded. You know, question arises who owns and can make use of those spare parts between, you know, a number of different separate subsidiary companies. But if you can get through those issues, then it can be potentially very impactful in terms of reducing asset downtime. And then I think finally, and, you know, this is very much the view of a disputes lawyer, but I I think we're, you know, we're moving away from the old models of maintenance contracts that were potentially put together, you know, ten years or so ago where the developer would typically step into the maintenance role, but with fairly wishy washy or or or less onerous or specific obligations. We're moving away from that.
Speaker 2:And certainly at OC, we're partnering with clients to be more innovative and forward thinking about those, how those contracts are procured and structured and what they cover off in terms of operational issues and and the kind of matters that we see. So those contracts do what we all want them to do, which is to help drive better performance of these assets.
Speaker 1:Yeah. I meant that. That's that's absolutely a point. And I think what we do really well at OC is that we have this feedback loop where we, as the disputes lawyers, work in an evolving way with our noncontentious colleagues who draft the contracts to make sure as we see issues coming live in the field, they then get picked up in in revised versions of of of template, o and m, EPC contracts, etcetera. So, yeah, really useful.
Speaker 1:So I am gonna wrap up there. It's been really useful talking with you, Matt, about some of the contractual tools available for asset managers in terms of, you know, how you address forms issues and how you can escalate these matters using the contract. So a really big thank you, Matt, for agreeing to be grilled by me on operation and maintenance issues.
Speaker 2:A big thank you for having me.
Speaker 1:And thank you, everyone, for listening. See you next time.